Interest in insurtech expected to hold despite sharp fall in investments

Global insurtech investment fell 57% in the fourth quarter of 2022, compared with the prior quarter, but smaller declines in early round funding signal continued interest in the sector.

The pullback to the lowest quarterly investment total in three years was driven by the macroeconomic environment and a rationalizing in the sector, which saw the number of insurtechs decline as good ideas survived and others fell away, experts say.

There has been a sharp decline in the number of companies operating in the insurtech sector, from about 3,000 global insurtech businesses at the end of 2019 to an estimated 2,050 currently, according to the Global InsurTech Report released earlier this month by Gallagher Re, the reinsurance brokerage business of Arthur J. Gallagher & Co.

Andrew Johnston, Nashville, Tennessee-based global head of insurtech at Gallagher Re, said “there were an unsustainable number of companies wanting to operate in the space” together with unsustainable company valuations.

“There was obviously a huge valuation froth going on in 2021 and for that froth to be checked, you typically need a large event,” such as the economic trends including inflation that took hold in 2022, Mr. Johnston said.

“There was some irrational level of funding in the marketplace,” said Bill Pieroni, New York-based CEO of Acord, the standards body for the insurance industry. “There were some over-inflated expectations.”

The market was due for a shakeout, experts say.

“After a record year for insurtech investments in 2021, a drawback was almost inevitable, especially considering the economic conditions of high inflation, rising interest rates and escalating fears of a recession,” said Neil Spector, president of underwriting solutions for Verisk Inc. in Jersey City, New Jersey.

Mr. Johnston said investors and technology users “now have a better understanding of what they want to get from the insurtech space. I think there’s a realization that there’s only so much bandwidth within individual businesses for technology focus.”

The decline in funding was driven largely by a drop in “mega-round deals,” those involving more than $100 million in funding, Mr. Johnston said.

Funding for such deals fell 89.7% to $153 million in the fourth quarter from $1.48 billion in third quarter. The fourth quarter total reflected just one deal, a venture-backed funding round for Clearcover, a Chicago-based digital auto insurer.

There was a 66.7% year-over-year drop in mega-round funding, according to the Gallagher report. Property/casualty insurtech mega-round funding fell 54.5% to $2.38 billion in 2022 and life/health mega-round funding was off 80.8% at $866.93 million.

Early-stage funding, however, saw a more moderate decline, down 25.1% to $408.8 in the fourth quarter from $545.35 million in third quarter.

The less severe drop shows that investors remain interested in i Mr. Pieroni said.

There is plenty of “dry powder” among venture capital and private-equity firms and, with the reduction in the number of insurtech companies, the money can be more accurately and efficiently deployed, he said.

He said that smaller, earlier funding rounds still find favor among investors.

“What tells me that there’s still interest is the money that still flows into early stage. There still is an inflow, slightly reduced, at entry-level funding,” Mr. Pieroni said.

“The past year may have slowed investments and caused people to re-evaluate the insurtech space, but interest is still quite strong,” Mr. Spector said.

Technology will continue to be in demand in the insurance industry. “Anybody who isn’t thinking about technology right now will do so in the future. There’s only one direction of travel for this,” Mr. Johnston said.

“There remains a strong appetite for innovation and new capabilities in the industry while digitalization expands,” Mr. Spector said.